What the Austro-Hungarian economic theorist tells us about the upheavals of our age.

December 22, 2016

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During the pitched battle in 2015 between Greece’s ruling Syriza party and the “troika”—the European Commission, the European Central Bank, and the International Monetary Fund—what appeared to be a struggle over grand policy quickly turned into a narrow one over currency.

BOOKS IN REVIEW

Karl Polanyi: A Life on the Left

Syriza had surged into office on a pledge to end austerity; the troika maintained its insistence that Greece would need to enact more savage cuts to government spending. The economic case, to say nothing of the human one, lay with Syriza. But the troika had an ace up its sleeve: Greece’s reliance on the euro. If Greece abandoned it, the country would be shut out of capital markets for generations and suffer untold consequences. The troika, recognizing its superior hand, called Syriza’s bluff and insisted the party accept a harsh austerity proposal. Syriza buckled and the Greeks are still stuck in a miserable cycle of austerity.

The unyielding inflexibility of the euro, and the wild-eyed ardency of its defenders, has caused several observers of this debacle to turn back to Karl Polanyi. The left-wing Austro-Hungarian sociologist and economic historian had been a violent critic of the gold standard—which, like the euro, restricted a nation’s capacity to inflate or deflate its currency based on the needs of its citizens. In his classic of economic history published in 1945, The Great Transformation, Polanyi showed how the gold standard made it impossible for nations to manage their own economies and how it often encouraged the retraction of welfare. It also empowered a small group of financial elites over the rest of society. Given their access to credit, bankers—rather than politicians and civil-society activists—became the country’s most powerful decision-makers. “Under the gold standard,” Polanyi complained, “the leaders of the financial market” find themselves “in the position to obstruct any domestic move in the economic sphere which [they happen] to dislike.”

For Polanyi, the problem with this social arrangement was not only that it impeded the democratic process but that it also allowed the interests of the market to assert their primacy over those of society. This happened in Polanyi’s time, during the late 19th and early 20th centuries when laissez-faire liberalism underwrote a violently unequal, predatory global capitalism with few social protections, and it has also happened in ours. Over the past four decades, and often at the behest of various banking interests, center-right and center-left parties throughout much of the North Atlantic have privatized generous stretches of the state and have allowed the logic of the market to pervade almost every aspect of social life. There are now thriving markets for passports and body parts. Cost-benefit analyses determine which departments at a public university get funding and which hospitals, parks, and schools get shuttered. In Polanyi’s time, his main concern focused on how swiftly and dangerously labor, land, and money became “fictitious commodities” and how this despoiled human life and the environment; today, we live in a world in which it seems like almost every social good is capable of being monetized: health, happiness, education, housing, communication, even citizenship have all become commodities sold and purchased on the market.

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But Polanyi’s Great Transformation was not all dark prophecy; it also offered us some insight into how societies rebelled against this marketization of social life. The free-market economy, Polanyi argued, not only empowered financial elites and commodified social goods; it also created a countermovement in which bodies of people emerged, demanding that the state protect them from the market. In his time, Polanyi believed this could be found in the insurgence of social democratic and socialist politics at the turn of the century, and today as well there are signs of a similar resurgence of social democracy, even socialism, in the party politics and thought of many European and North American countries. These might be indications, however incipient, of what Polanyi called the “double movement”—of society’s tendency to strike back after an age of privatization and economic liberalization—and they may bring back the more radical implications of Polanyi’s argument with them.

* * *

To search for Polanyi’s intellectual and political roots means coming into contact with a bewilderingly febrile left-wing intellectual milieu that appears to have little bearing on our present. However promising the current moment may seem with a self-described “democratic socialist” coming tantalizingly close to winning the Democratic Party’s presidential nomination, Gareth Dale’s new biography offers us a bracing reminder of a far richer world of socialist activity that once existed in much of the West. Debates over early-20th-century Hungarian socialism; the strategic plans of “Red Vienna”; the reformist 1961 platform of the Soviet Communist Party: These questions obsessed Polanyi and his contemporaries to a degree that seems almost inconceivable now and certainly residing in a sobering distance to our own immediate lives. Polanyi’s political activism and intellectual work were implicated in the widest questions debated on the left. The son of wealthy Hungarian Jews, he emerged as part of the “Great Generation” of Hungarian artists and intellectuals in Budapest at around the turn of the 20th century. John von Neumann, the mathematician, and Béla Bartók, the composer, were his contemporaries; so were the sociologist Karl Mannheim and the Marxist theoretician and literary critic György Lukács. Polanyi’s brother, Michael, became a philosopher of science, who for many years was better known than Karl.

Living in Budapest, connected to a self-confident and industrializing West but set apart from it by language and often religion, Polanyi and his contemporaries embodied one of the central facts about the cultural and political ferment that we often equate with modernism: Its vitality depended on the admixture of a modern social order and outlook with often archaic folk communities. (Bartók’s music is a classic example.)

Dale makes much of Polanyi’s being a “non-Jewish Jew,” a phrase borrowed from Isaac Deutscher, and he classes him with other semi-detached Jewish modernists—Freud, Kafka, Trotsky—who Dale argues lived, as a result of both their backgrounds and intellectual dispositions, “on a margin within a minority.” “To a degree,” Dale explains, “the radicals around Polanyi adopted the stance of the conscious pariah, spurning the sycophancy of conservative fellow Jews and rejecting not only the chauvinism of aristocratic Hungary but also Zionist separatism.” What they longed for was “a social order in which the entire issue of assimilation would be an irrelevance.”

Socialism was the air they breathed, however riven it was into various currents and eddies: the guild socialism of Otto Bauer, the liberal socialism of Eduard Bern­stein, the Bolshevism of Lenin. And early in his career, after having been a brilliant student of law at the University of Budapest, Polanyi found himself drawn to liberal socialism, which for him meant a policy of encouraging workers’ cooperatives and an egalitarian distribution of income alongside a market free from state intervention. In fact, in 1914, he even helped found a liberal socialist party: the improbably named Radical Bourgeois Party that proposed land reform, extension of the franchise, and the separation of church and state, and that, unlike the Hungary’s Social Democratic Party, discouraged class conflict and believed that the bourgeoisie—not the working class—was the true emancipators of society

Weeks after the party’s founding, the Archduke Franz Ferdinand was shot and killed in Sarajevo, and the Austro- Hungarian Empire declared war on Serbia. The hopes of the Radical Bourgeois Party, and of various other strands of socialism, were soon engulfed in a state of crisis. The socialist movement splintered over World War I, pitting the social-democratic parties against each other and against their allies to their left. It also split friendships within the Great Generation. Many found themselves divided along the broader lines created by the world war. Lukács did not fight (thanks partly to parental connections that saved him from the draft), and he drifted toward the minority of revolutionary socialists who opposed the war, Lenin among them. Polanyi enlisted in the military, but like countless others, the war’s human and social devastation left him profoundly shaken.

Stricken with typhus in 1917, Polanyi read the New Testament during his convalescence. He drifted away from active political life and converted to Christianity. Though he did not attend church regularly, he found a “revolutionary” message in the Christian tradition: The Gospels offered, in Polanyi’s words, “the way to a higher life, over and above personal self-interest,” emboldening individuals to “act with uncompromising radicalism, the almost terrifying radicalism of Jesus.” In later years, he came to find the New Testament inadequate, accusing Christianity of having fostered the conditions for the rise of capitalism. But while Polanyi eventually returned to politics, something of this Christian communitarianism would linger in his assessment of the moral costs of the market economy.

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In 1919, the fall of the Hungarian Republic drove Polanyi to Vienna. There, while teaching at a university, he began to test his commitment to some form of socialism in debates with free-market theorists Friedrich von Hayek and Ludwig von Mises.

Vienna, at the time, was run by the Social Democratic Workers’ Party, and was undergoing a spectacular experiment in municipal socialism. The experience of a socialist city run on a democratic basis—with its socialist newspapers, its evening lectures on the socialist implications of the theory of relativity, its socialist chess clubs—enlivened Polanyi, confirming once again his belief in the possibility of a parliamentary road to socialism. But like his first foray into political life, the hopes and possibilities of Red Vienna were short-lived. Finding itself incapable of maintaining its bulwark against a countryside in thrall to right-wing parties, the socialists in Vienna could do very little but watch as the nationalist right took over the Austrian state in 1933 and suspended its parliament.

Witnessing, for a second time, the retreat of social democracy, Polanyi began to perceive a fundamental conflict between democracy and capitalism. Democratic politics, he argued, seeks to “intervene in the economy, disrupting and undermining it” for the sake of a society’s welfare, whereas laissez-faire economics insists on allowing the market to regulate itself. These tensions often do not resolve themselves to the benefit of democratic institutions; elites in charge of the economy often respond to demands that they discipline the market “with a general storm upon democracy.”

Something of this nature happened in Vienna when Polanyi was living there. The Austrian wing of the Nazi Party mobilized the business elite, who saw the social democrats and socialists as a threat to their unchecked power over the economy, and after engaging in several years of armed thuggery was able to take power in the 1930s. The Social Democratic Party had a stronghold over several of Austria’s cities, but its “serial failures of nerve,” as Dale puts it, in the end cost it the day. Before the Anschluss, and shortly after the Austrian parliament was dissolved, Polanyi fled to London, where, in melancholy exile and under the gathering storm clouds of fascism and war, he began to assemble the notes and ideas that would become The Great Transformation.

* * *

In England, Polanyi found himself among the great left-wing thinkers of British social democracy, men like R.H. Tawney and G.D.H. Cole. It was here that Polanyi’s masterpiece of economic history and theory began to acquire its particular contours. Written between 1941 and 1943, The Great Transformation traces the rise of the market economy from its origins in the early modern period to the introduction of the factory into commercial society. Polanyi illustrates the disfiguring aspects of the market economy—how it threatens to devastate the planet at every level—but he also points up its novelty. “In spite of the chorus of academic incantations so persistent in the nineteenth century,” he writes, “gain and profit made on exchange never before played an important part in human economy. Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life.” Revealing how the market economy was a recent invention in modern life allowed Polanyi to also suggest how society might not be organized around its principles.

There are many ways to read The Great Transformation: as a book about the rise of liberalism and the origins of the welfare state, as a discussion of the birth of fascism and why Europe went to war. But Polanyi also had more immediate concerns. His argument was also a rebuke of right-wing arguments, often made by libertarian figures like Hayek and Mises, about the impracticality of left-wing thinkers. While socialists are usually the ones charged with being irresponsible dreamers, Polanyi wanted to show that it was economic liberals who were in fact dedicated to an implausible utopia. An unchecked market was anything but natural. Left to function on its own, it destroys human beings and the planet along with it.

In its critique of 19th-century liberalism, The Great Transformation offers a remarkable amount of insight into how it helped commoditize those parts of human culture that should have remained outside the jurisdiction of the market—in particular, land, labor, and money. Subject to the logic of the market, instead of how the use of these social goods might benefit or harm society, land, labor, and money are transformed into what Polanyi calls “fictitious commodities.” According to the utopian advocates of laissez-faire economics, these goods are better off traded on the open market, but as Polanyi shows in his book, if land, labor, and money are permitted to follow the mechanisms of the market alone, there would be few safeguards to protect their health, leading to significant devastation.

This was recognized not only by socialists and critics of the free market but by many liberals who discovered that various attempts at the commodification of these goods resulted in massive social dislocation and upheaval; and so, as Polanyi shows, liberals also turn to the state to ensure that the “self-regulating” market could emerge despite these disruptions. Many of the central elements of this economic system—a “competitive labor market, automatic gold standard, and international free trade”—were far from naturally occurring, and they also required a state to ensure that “self-regulation” didn’t cause too much damage. The free market could not simply come into being on its own; it had to be legislated.

England, the home of economic liberalism, passed the anti-corn law in 1846, called the Importation Act, which lowered British agricultural tariffs. There were also the Bank Charter Act of 1844, which cemented the gold standard, and the Poor Law Amendment Act of 1834, the bête noire of Charles Dickens, which ensured that the poor would be forced to work at subsistence wages in order to live. “The road to the free market,” Polanyi writes, “was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism.”

Ad hoc countermeasures designed to protect the populace against this newly liberated market emerged in the years after laissez-faire economics set in: the criminalization of child labor in the mines; food “wholesomeness” laws; a workers-­compensation act holding employers liable for injuries to their employees. The self-regulating market, Polanyi argued, helped generate a spontaneous movement against it. In his excellently pithy formulation: “Laissez-­faire was planned, planning was not.”

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Even so, this double movement didn’t result in the erection of a true welfare state or the kind of social democracy that Polanyi championed. He believed this was because the architects of economic policy were concerned only with keeping the social fabric from fraying irrevocably, not with finding ways to actually reassert society’s power over the market.

This refusal to fully embrace a more robust social-democratic model was also why so many policy-makers resisted taking their countries off the gold standard (Franklin Roosevelt being a notable exception): It robbed them of the ability to induce the threat of a run on the currency and to maintain both their own and the market’s supremacy over public-policy matters.

Even socialist governments found themselves hamstrung by the gold standard. The administration of Léon Blum in France couldn’t engage in real deficit spending, because financial interests maintained a franc that was pegged to gold. The growing tensions between political and economic power appeared to have reached a stalemate. Either the gold standard had to be abandoned, as it was in the United States, allowing for the New Deal; or economic power would have to move against democracy, as happened in fascist Europe.

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The “great transformation” to which Polanyi looked forward was the creation of a socialist society free from economic coercion, one in which “fictitious commodities” like land, labor, and money were once again understood as social goods. (The original titles he had in mind for his book were The Liberal Utopia and Freedom From Economics.) Writing in the early 1940s, Polanyi imagined that this transformation was already in sight. As a result, in one of his depressingly frequent political misjudgments, he overestimated the socialist direction of Clement Attlee’s Labour government after the war. Indeed, Polanyi would find himself routinely surprised when his early enthusiasm was disappointed, such as when Attlee preserved England’s deeply unequal “public-school” system, which ensured that aristocratic elites who could afford and gain entry to the nation’s best schools remained a governing caste.

Polanyi also didn’t foresee that the double movement of economic planning and social protections that he had in mind could simply continue to prop up a market economy in the postwar years rather than dismantle it. For all the perspicacity of The Great Transformation, Polanyi entertained a strangely naive attitude toward politics, both in the social-democratic West and the communist East. A more sympathetic observer of the Soviet Union than most of his comrades on the left, Polanyi defended Stalin during the show trials, lauded the Molotov-Ribbentrop Pact, and imagined that the Communist Party’s reform document of the 1960s indicated a genuinely new direction—well after the intellectual left in both Britain and the United States had rightly lost all faith in the Soviet Union.

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Polanyi’s notion of the double movement was always an ambiguous formulation. On the one hand, it explains the removal of some erstwhile commodities—­health, transportation—­from the market in welfare states. On the other, it has been used to validate even the mildest forms of social protection, such as Muhammad Yunus’s Grameen Bank, which do little to stop the march of globalized capitalism and possibly help to perpetuate it.

In fact, as the feminist theorist Nancy Fraser has noted, the welfare state’s social protections can have their own problems of domination. And this has resulted in the need for another movement to work alongside the double movement: protection within social protection. One might argue that what we really need is not just Polanyi’s double movement but a triple one: a politics that sustains socialism and social democracy’s democratic and emancipatory promises once either is in power.

Polanyi seems to have foreseen some of these objections and offered a defense of the smaller reforms: “Why should the ultimate victory of a trend be taken as a proof of the ineffectiveness of the efforts to slow down its progress?” he asked. “And why should the purpose of these measures not be seen precisely in that which they achieved, i.e. in the slowing down of the rate of change? That which is ineffectual in stopping a line of development altogether is not, on that account, altogether ineffectual.” And in moments like these, there is Polanyi’s refreshing reminder that a failure to stop an entire system isn’t necessarily a failure: Reform does not preclude something more radical in the future.

But the place where Polanyi ended—a vision of a socialist and social-democratic state pushing back against the commodification of social goods—is one that leaves us with the dilemma we still face. Many of the attempts to reform the market economy have foundered or been countered by right-wing retrenchment. The Bernie Sanders and Jeremy Corbyn phenomena aside, social democracy is hardly thriving; most of its parties are in disarray, challenged on both the insurgent left and the revanchist right. What appears presently to be in crisis is liberalism itself, with violent, ugly solutions proffered by neofascists across the globe.

Polanyi was witness to just such a challenge, in Hungary and Red Vienna, driving him to adopt more radical positions—and, ultimately, to find himself against the market economy altogether. It is this Polanyi, the one least gracious to capitalism and least enchanted by its so-called freedoms, who speaks most clearly to our present moment; it is this Polanyi who renounces his—our—desire to be satisfied with meager fixes and urges us instead to turn our collective frustration and energies against the economic system that threatens our destruction.

Nikil SavalNikil Saval is an editor at n+1 and the author of Cubed: A Secret History of the Workplace (Doubleday).